The income tax law is founded on the meticulous distinction between capital and revenue receipts as well as their flip side, revenue and capital expenditure, so much so courts in India have to expend a great deal of the judicial time and energy on this hairsplitting exercise. But there are certain clear cut cases that do not involve any hairsplitting. Payment of income tax is one of them. Income tax even though a financial outgo is by no means expenditure in earning income.
And if an outgo is not tax deductible expenditure, its refund cannot be income either. Therefore, the income tax refund is not one's income. That being the case, the interest payable on income tax paid in excess triggering refund cannot be treated as income either. But, for the first time, the income tax return (ITR) forms require one to furnish his interest income in detail " interest from savings bank account, interest from fixed deposits and interest on the income tax refund. The last one stands out both as odd and ridiculous.
Lumping bank interest with the omnibus income from other sources, encouraged people not to take the pain of analysing this source of income with a fine tooth comb. Now they have to.
Senior citizens especially have to because Section 80TTB confers on them a sizeable tax exemption for bank interest " up to Rs 50,000. So, while there is every justification for income tax officers to insist on more than cursory furnishing of details relating to interest, there is none for demanding details of interest on the income tax refund.
Interest on income tax refund arises principally because of the excess of advance tax and tax deducted at source (TDS) over the actual tax liability. For example, Section 194J asks anyone paying professional fees to deduct 10 percent. But given the tax exemption up to Rs 3 lakh for senior citizens and generous deductions under Section 80, there may not be any tax liability at all thus warranting the return of the entire TDS.
It is not as if the interest clock starts clicking from day one. Instead, it starts ticking only from the first day of the assessment year. Let us take a practical case. Let us say a writer contributes articles for a journal. Ten percent TDS would be deducted by the journal starting right from the first month, namely, April invoice presented by the writer. But the interest clock starts ticking not from 1 April of the financial year but from 1 April of the assessment year. So this poor author, let us say, claims a refund of about Rs 80,000 by filing his return at the earliest " in the middle of the assessment year. Let us say the assessment is completed in May.
The interest for these two months at 1 percent per month works out to Rs 1,600. The taxman wants to treat this as the income of the next year. How squeamish of him!
First of all, the author did not place a fixed deposit with the Income-Tax Department, as it were. The interest he got was not covered by him. It was more by nature of penalty on the department for its overzealousness. Even companies that get to file their returns a little leisurely do not pay advance tax in excess with an eye on 1 percent per month interest that kicks in from the first day of the assessment year.
Penny wise pound foolish is an old hat. That, however, is precisely what the Central Board of Direct Taxes (CBDT) is seeking to do.
(The author is a senior columnist and tweets @smurlidharan)